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an e c o n o m ic re v ie w b y th e F e d e ra l R eserve B a n k o f C hicago The economy, the Midwest, and Chicago District farmland values soar Banking developments a p r il 1974 The economy, the Midwest, and Chicago 3 District farmland values soar 8 Econom ic trends in the sixcounty Chicago area seldom vary from national patterns because o f the area's great size, central location, and its extensive diversity o f industry. Farm land values in the M idw est experienced the sharpest annual increase in a h a lf century in 1973. Considering projected levels for farm income and m ortgage rates, land values are likely to continue an upward trend in 1974. Banking developments 13 Subscriptions to Business Conditions are available to the public free of charge. For information concerning bulk mailings, address inquiries to Research Department Federal Reserve Bank of Chicago, P. 0. Box 834, Chicago, Illinois 60690. Articles may be reprinted provided source is credited. Please provide the bank’s Research Department with a copy of any material in which an article is reprinted. Business Conditions, April 1 9 7 4 3 T he econom y, th e M id w e s t, and C hicago strengthened. Moreover, markets for most The prelim inary estimate o f the Depart types o f consum er goods and services did m ent o f Commerce indicates that “ real not soften during this troubled period, and G N P ” —the dollar value o f the nation’s those sectors that were m ost seriously total output o f goods and services adjusted for price ch an ges—declined in first-quarter affected—full-sized cars and recreational v e h ic le s — h a ve sh ow n im provem en t 1974 at a seasonally adjusted annual rate o f alm ost 6 percent—the sharpest drop recently. since the first quarter o f 1958. The “ GNP The housing industry has shown a few deflator,” a measure o f changes in the signs o f revival, but the recent upsurge in general price level, rose at an annual rate interest rates has raised the spectre o f o f alm ost 11 percent in the first quarter, the renew ed “ disinterm ediation,” deterior worst perform ance since 1951, during the ating inflow s o f savings to the thrift in Korean War. stitutions that provide the bulk o f funds for These disturbing statistics are not un residential mortgages. The tight money expected news. They reflect first, the situation in residential mortgages is adverse im pact o f the petroleum shortage, pronounced in Illinois, m ainly because o f principally on the output o f the auto, the 8 percent usury rate which is currently petroleum refining, airline, and recreationbelow rates prevailing in other states. The generally accepted definition o f a related industries; and, second, the depressed housing market where the adverse effect o f high market Food and fuel have led interest rates was com pounded by the rise in consumer prices u n ce rta in tie s rela ted to fuel percent, 1967=100 supplies. The accelerated rate o f price inflation in the past several months has been apparent to con sum ers b e ca u se it has been centered in food, gasoline, and other fuels. It is hoped that the drop in total real output has leveled o ff and that the second h a lf o f 1974 w ill see some revival o f growth that will co n tin u e in to 1975. Virtually without exception, capital goods producers, w ho are particularly im portant in the Midwest, are ex periencing unprecedented strength in demand. The capital goods boom did n ot falter during the embargo, and, on balance, probably was 4 “ recession” is two consecutive quarterly declines in real GNP. It is possible that the terms o f this definition will not be fulfilled in 1974. But even i f this were to be the case, the econom ic consequences o f the ArabIsraeli war cannot be equated with a classical recession in which m ost sectors o f the econom y display weakness. Un doubtedly, there w as a possibility that a cumulative decline m ight have spread throughout the econom y in late 1973 and early 1974. But the danger appears to have lessened. Despite widespread expressions o f pessimism, the bulk o f consumers, busi nessmen, and lenders have maintained their m orale and have not retrenched their sp e n d in g p la n s. T h e e co n o m ic in telligence efforts o f the Federal Reserve System continue to remain alert to the many pitfalls inherent in the unstable en vironm ent o f the past six m onths as they m o n it o r an d a p p r a is e e c o n o m ic developments at home and abroad. Chicago and the Seventh District O v e ra ll econom ic trends in the Chicago area—six counties in Illinois and two in northern Indiana—seldom vary significantly from the national pattern. This is because o f the area’s great size, its central location, the extensive diversifica tion o f its m anufacturing and service in dustries, and its position as the M idwest’s e c o n o m ic m e t r o p o lis o f in d u stry , agriculture, trade, and finance. The C hicago area’s population now ex ceeds 7.8 million people, placing it third behind New York and Los Angeles (broad ly defined). Over 5.5 million people live in Cook County, o f w hom 3.4 m illion are in the central city. In the decade o f the Seven ties, the population o f the eight-county Chicago area increased by 12 percent, com pared to 13 percent for the United States as a whole. The population o f the city o f C hicago declined 5 percent from 1960 to Federal Reserve Bank of Chicago Strength in capital goods contrasts with slump in autos percent, 1967 = 100 150 I I __I__I__L J---1---1 - i __ i__ i__ __ i___i__ i__ __ i_ 1969 1970 1971 1972 1973 1974 Note: Physical volume of output com ponents of the industrial production index. 1970. (The boundaries o f the city have been circumscribed for m any years.) In part, this was the result o f demolitions o f residential structures resulting from urban renewal and the building o f expressways. Declines in the population o f core cities have been com m on throughout the nation. But population growth in the remainder o f Cook County, and in the seven outlying counties, continued at a fairly rapid pace. With declining birth rates in recent ears, population growth has slowed in the entire C hicago area, probably about as much as in the nation. When the Federal Reserve System was organized in 1914, Chicago was an obvious choice for the location o f one o f the regional Federal Reserve banks. The Seventh Federal Reserve District as delineated in 1914 included, and still includes, all o f Iowa and the m ajor portions o f Illinois, In diana, Michigan, and W isconsin. These states, which have 16 percent o f the nation’s population, produce 22 percent o f its manufactured products and about the Business Conditions, April 1 9 7 4 sam e p ro p o rtio n o f its agricultural products. On the other hand, it has a smaller than proportional share o f the n ation’s extractive industries, lumbering, recreational activities, and government. The Corn Belt, which contains the richest farm land in the nation (if not in the world), cuts a wide swath through Iowa, Il linois, and Indiana. The district produces about one-half o f the nation’s com and soybeans, and markets about one-half o f its hogs. In m anufacturing, motor vehicle output remains concentrated in Michigan, which has over 40 percent o f the industry. The five-state region, taken as a whole, has a substantial stake in the currently boom ing capital goods industries. These states produce over 30 percent o f the nation’s steel and at least 30 percent o f its producer goods. For farm, construction, and metal working equipment the share is much larger. In consum er goods, the five states produce 50 percent o f the nation’s televi sion sets, and over 30 percent o f its h o u s e h o ld a p p lia n c e s . T h e re g io n , therefore, is relatively strong in “ hard” as opposed to “ soft” goods. Chicago’s contribution The C hicago area is the natural focal point o f the industry and trade o f the Midwest. It provides transportation, finan cial, warehouse, and other services for sur rounding states and areas. The growth and continued vitality o f the Chicago area are due largely to its loca tion. Few places in North America were so clearly foreordained as great centers o f p o p u la tio n , industry, commerce, and finance as the land surrounding the mouth o f the Chicago River and extending south along the foot o f Lake M ichigan. The area is unique in that it stands astride the waterways o f the Great Lakes and the M is sissippi and its tributaries. Moreover, C hicago is the natural center o f the air, rail, and road transportation systems con 5 necting the M idwest with other regions o f the nation. Aside from transportation, the Chi cago area benefits from the flat terrain ex tending far into the hinterland. Real estate d e v elop m en ts ca n p roceed w ith a minimum o f costly site preparation. In com m on with other Great Lakes cities, the C hicago area has ample fresh water for in dustrial and dom estic purposes. These and other advantages—a large and varied labor force, availability o f business ser vices, ample capabilities o f local utilities, and educational and cultural facilities— maintain the area’s econom ic vigor. In addition to the Federal Reserve Bank, C hicago is the home o f the Board o f Trade, the Mercantile Exchange, the Midwest Stock Exchange, and the region’s Home Loan Bank. These organizations, along with the com m ercial banks and other financial institutions located in Chicago, are playing ever-larger roles in the national and international econom ic structure. In the past year, a number o f the New orders for business equipment continue to outpace rising shipments billion dollars seasonally adjusted m onthly data J__ I__ I__ l—l— l__ I I 1972 I__I__L_l__I__ I 1 1 __ 1_1__I__■ ■ I 1973 ■ I__■ ■ ■ ■ ■ ■ 1974 6 largest foreign banks have applied for the right to establish branches in Chicago. Diversified employment About 3 m illion people currently are employed in nonfarm w age and salary jobs in the C hicago area, o f w hom 30 percent are in the relatively volatile m anufac turing sector. For the nation as a whole, manufacturing accounts for 26 percent o f total payroll employment. In Milwaukee and Detroit, 35 percent o f the jobs are in manufacturing, and in m any smaller centers the proportion substantially ex ceeds 40 percent. Within manufacturing, the Chicago area’s m ost im portant single industry is steel, with mills located in the South Chicago-northern Indiana area. For many years, this has been the nation’s leading steel center. New steel plants have been added in the past decade and ad ditional expansion plans are underway. Despite the recent sharp decline in shipments to the auto industry, the steel mills continue to operate at effective capacity. About 30 percent o f the C hicago area’s manufacturing em ploym ent is in either the ’’electrical m achinery” or “ nonelectrical m achinery” classifications. But these are statistical groupings rather than in dustries. Firms so-classified produce a wide variety o f components and finished equipment for industry, agriculture, con struction, mining, utilities, and transpor tation, as well as appliances, TV sets, lighting, and recreational equipment for consumers. The area also produces a wide v a rie ty o f “ n on d u ra b les” —petroleum products, processed foods, and apparel. De mand for virtually all these products con tinues to be very strong. Perhaps m ore than any other center, the Chicago area represents a scaled-down version o f the nation as a whole. By and large, therefore, econom ic developm ents in the Chicago area parallel national trends. Federal Reserve Bank of Chicago Consumers spend freely on most goods as autos sag billion dollars 1972 1973 1974 In recent years, however, growth in employment in the Chicago area, as in most other large metropolitan areas, has lagged the national performance. This reflects, in part, the national trend toward decentralization o f industry to smaller, nonmetropolitan (even rural) areas. But, in the case o f Chicago, it m ay also reflect the lack o f sufficient numbers o f qualified workers. The unemployment rate es timated for the Chicago area as a w hole in February 1974 was 3.6 percent, compared with 5.2 percent for the nation. For m any years, the unemployment rate estimated for the C hicago area has been well below the national rate, and also below the rate for m ost o f the very large metropolitan areas. Because o f its diver sification, the C hicago area was not significantly affected either b y the defense cutbacks that followed 1968, or the sharp slump in sales o f passenger cars that began last fall. On the other hand, it has not had the same degree o f stimulus from the capital goods boom that has been so noticeable in Milwaukee, Peoria, Rockford, Business Conditions, April 1 9 7 4 and the Quad Cities areas. Although the unem ploym ent rate for C hicago has remained relatively low, the situation varies sharply am ong the hun dreds o f municipalities included in the eight-county metropolitan area and within the city o f C hicago itself. In the core city there are neighborhoods, m ainly with m inority group populations, that have very high rates o f unemployment. In addi tion, these depressed sectors o f the city have m any people o f working age who are not counted as part o f the labor force— n eith er em ployed nor seeking work because o f a variety o f reasons. While some sections o f the city have unem ploym ent problems, in other parts o f the city, and in m any o f the suburbs, employers have com plained o f shortages o f trained or trainable workers in the past year or so. This repeats the experience o f the middle and late 1960s. The city has witnessed a long-term exodus o f industry to the suburbs or to smaller centers outside the metropolitan area. Throughout the C hicago area, the problem o f m atching people and jobs is intensified by two form id a b le o b s t a c l e s : (1) in a d eq u a te educational attainm ent o f job seekers, and (2) lack o f suitable transportation. Looking ahead T he e x p e rie n ce o f the nation’s econom y since World War II has not been kind to chronic pessimists. Recessions have been short and shallow, b y the stan dards o f earlier history, and m any widely heralded recessions have not, in fact, materialized. If such predictions for 1974 prove w rong for the nation they w ill cer tainly be wrong for the Chicago area, which is n ot vulnerable to upsets in a few specific industries. The uptrend in capital expenditures by business appears to have great momen tum. New orders continue to outrun rising 7 shipments, and order backlogs, in many cases, stretch into 1975 and beyond. In creases in output in m any firms are hampered by serious shortages o f plant capacity, materials, components, and skilled labor. In the energy field, even assuming a continued flow o f M ideast oil, enormous investments in new facilities are expected to be required for m any years to come. Consumers, despite their pessimistic responses to consum er surveys, continue to spend fairly freely. Through mid-April, consumer outlays on goods, other than autos, were up 10 percent from last year, a somewhat larger increase than for after tax income. With im proved supplies o f gas olin e, sa les o f fu ll-sized cars and recreational vehicles can be expected to im prove—indeed, there are signs that this has already begun. Consumer incomes will be boosted in 1974 and follow ing years by large increases in worker compensation, pensions, and other payments. Increasing ly, income recipients are “ protected” against inflation by escalation agree ments tied to the consum er price index. The extremely rapid price inflation o f the recent period is likely to moderate somewhat as food and fuel supplies im prove in the months ahead. But it would be unwise to count on a drastic slow ing in the rate o f rise in the general price level. Prices o f many manufactured goods, and o f m any services, have not yet “ caught up.” The gradual disestablishm ent o f price controls will certainly encourage producers to pass on higher costs as they are incurred. Midwest consumers and businesses purchase goods and services in markets that, for the m ost part are strongly in fluenced by national trends. For example, changes in the consumer price index for the C hicago area parallel the national in dex fairly closely. Control o f inflation is not a local or regional matter but requires the full endeavor o f the nation. 8 Federal Reserve Bank of Chicago District farm land values soar Farmland values in the M idwest rose near ly one-fourth last year. Although the value o f farmland in the Seventh District has ex hibited a persistent upward trend since 1940, the 1973 rise was the sharpest annual increase in over a h a lf century. Increases in the value o f district farmland were pervasive, although the rate o f increase varied widely from state to state. Farm land values in Illinois and Iowa recorded the largest gains, up 28 per cent and 26 percent, respectively, from a year earlier. Indiana land values increased 24 percent, M ichigan farm land prices in creased 19 percent, and those in W isconsin rose 16 percent. Farmland values are determined by the interaction o f numerous demand and supply forces. W hile the reasons for changes in farm land values are often obscured and difficult to isolate, at least four factors com bined in 1973 to provide the impetus for the largest increase in m odem times. • The im provem ent in current and prospective crop prices significantly in creased the net returns on farmland. • Credit to finance the purchase o f fa rm la n d w as re a d ily a v a ila b le . • Pressures to enlarge the size o f farm operations were increased as farmers upgraded m achinery inventories. • F arm lan d prices have increased faster than the rate o f inflation causing m any investors to consider farm land as a hedge against inflation. Farm incomes and land prices Record crop and livestock prices resulted in a sharp rise in farm incomes in 1973. Agricultural prices, reflecting surg ing domestic and international demand, were up about one-third, and netU . S. farm income reached an unprecedented $26 billion, over 30 percent higher than a year earlier and nearly 60 percent larger than the average for the previous five years. M ost Seventh District farmers ex perienced even larger incom e gains than did farmers in the nation as a whole. Total cash receipts from farm marketings at the national level were up 38 percent, but In diana farmers experienced a 57 percent in crease, Illinois farmers a 49 percent in crease, and Iow a farmers a 44 percent in crease. A ll three o f these states are heavily engaged in grain production, the strongest sector o f agriculture during 1973. Cash receipts from fa rm m a rk e tin g s in M ichigan and W isconsin rose less than in other district states, reflecting the more diverse range o f com m odities grown in those states. Higher incom e levels placed farmers in a very liquid financial position and they were able to allocate large sums from their cash flow to purchase real estate which, in effect, increased demand. A t the same time, the higher incom e levels provided greater incentives for those w ho presently own farmland to retain ownership and thereby reduce the available supply o f transferable land. Both situations served to apply upward pressures on land prices. A m ajor influence on the value o f farmland is the sum o f expected future returns discounted to the present. The im pact o f changes in current and expected in come on the price o f farm land can be il lustrated by the change in per acre returns o f a typical corn farm. Over the past several years, net returns averaged around $25 per acre. However, during 1973 returns jumped to about $100 per acre. I f the different incom e levels were capitalized Business Conditions, April 1 9 7 4 District farmland values recorded astounding increases . . . percent change into land values utilizing an 8 percent in terest rate, w hich assumes that the income levels continue indefinitely, the value would have increased from approximately $300 per acre to nearly $1,300 per acre. More than one year’s earnings must be considered, o f course, when evaluating the incom e-producing ability o f farmland. While it’s unlikely that farm income will re main at the 1973 level indefinitely, returns on farm land are expected to be higher in the near future than in the years just prior to 1973. 9 price reached 78 percent in 1973,4 percent age points m ore than the previous high. Similarly, the percentage o f farm real es tate transfers on which debt was incurred stood at 86 percent throughout 1973, 4 percentage points more than the previous year and a new record. Interest rates charged by institutions for farm m ortgage funds held relatively steady in the first h a lf o f 1973 but then turned sharply upward in the second half. By year-end, the average interest rate on farm real estate loans charged by major real estate lenders ranged from 7.75 to 9 percent, from nearly .50 to .75 o f a percent age point over the rate o f a year earlier. Nevertheless, those w illing to pay the higher interest costs apparently had little problem obtaining farm real estate credit in the second h a lf as reflected by the rapid increase in new real estate loans provided by the institutional lenders. . . . despite rising farm mortgage interest rates in 1973 percent 9.5 Farm real estate credit Am ple availability o f credit facilitated the rapid expansion in farm real estate land values in 1973. Both the total amount o f farm real estate credit extended and the year-to-year increase rose to record levels. Paralleling the increase in credit exten sions, the proportion o f farm land transfers involving credit and the proportion o f the purchase price financed b y credit rose to record highs. The ratio o f debt to purchase II 1972 III IV I II III IV 1973 ‘ Average rate on new commitments made during quarter. “ Average rate at end of quarter. Federal Reserve Bank of Chicago 10 Both income and interest rate changes affect farmland values Interest rates Net income per acre $80 $20 $40 $60 $100 (dollar value) 5 6 7 8 9 10 400 333 286 250 222 200 800 667 571 500 444 400 1,200 1,000 857 750 667 600 1,600 1,600 1,143 1,000 889 800 2,000 2,000 1,429 1,250 1,111 1,000 Rising interest rates, and credit con ditions that have generally prevailed dur ing such periods, usually affect farmland values in a negative manner. The m ost re cent example was the 1969-70 credit crunch when growth in Seventh District farmland values halted, and in m any instances ac tually declined. High interest rates reduce the am ount o f credit a farmer can service for a given amount o f incom e and, therefore, the amount o f land he can purchase on credit. Moreover, increasing interest rates discourage m any farmers from refinancing mortgages obtained at lower rates in earlier years. Also, tight credit conditions usually signal increases in downpaym ents, shorter maturities, and an overall reduction in available farm real estate credit—all depressing factors on the land market. Although the effects o f changing cred it c o n d itio n s are im possible to measure accurately, the im pact o f interest rates on land values can be illustrated by discounting the expected incom e per acre by different interest rate levels. For exam ple, at a 7 percent interest rate, land that produces an annual net incom e o f $40 would be valued at $571 per acre. I f interest rates rise to 8 percent, the same land would be valued at $500 per acre, all other things equal. Therefore, rising interest rates usually act as a deterrent to increases in farmland values. The increase in actual and expected in come, however, more than offset the in crease in interest rates during 1973. Moreover, other conditions generally asso ciated with tight credit—increased downpaym ent requirements and shorter repay ment schedules—failed to materialize. Federal Land Banks (FLBs) led all other institutional lenders in extensions o f farm real estate loans during 1973. New money loaned by FLBs in Seventh District states was up 50 percent from the previous year and outstandings stood 10 percent above the year-earlier level. A t the national level, the volume o f new FLB loans also grew 50 percent, but outstand ings grew almost twice as fast as in the Seventh District. The difference in growth o f outstandings indicates paydow ns at a much faster rate than at the national level, a reflection o f the higher-than-average farm incomes in district states. Relatively new, lower dow npaym ent requirements on FLB loans m ay be con tributing to rapid expansion in credit ex tended by FLBs. The Farm Credit A ct o f 1971 gave FLBs the authority to expand their loan limits from 65 percent o f normal agricultural value to 85 percent o f current market value. The effect o f this change has been to reduce by more than 50 percent the legally required dow npaym ent on land purchases financed by FLBs. A farmer with a given am ount o f in vestm ent capital, therefore, can bid more for the farmland and still finance the loan under the revised dow npaym ent provisions. Banks and insurance com panies, the other m ajor institutional lenders, also achieved notable increases in farm real es tate credit volume. A t year-end 1973, out standings at Seventh District member banks were 12 percent higher than a year earlier. National data indicate that in su ra n ce co m p a n y fa rm real estate mortgage volum e was up 6 percent in 1973. In contrast to the rapid expansion in credit extended b y institutional lenders, 11 Business Conditions, April 1 9 7 4 seller financing o f farm real estate showed only m odest increases during 1973. Sellers often prefer to transfer farm land via an in stalm ent sales contract because it allows the seller to spread capital gains tax paym ents over the life o f the contract. A c cording to the Internal Revenue Code, if less than 30 percent o f the sale price o f land is received in the year o f the sale, capital gains tax will be due only as paym ents are received rather than on the full purchase price in the year o f the sale. In addition, since interest paym ents must be reported as ordinary incom e, sellers o f farmland w ill often decrease the interest rate charg ed on the transaction and inflate the price o f the land. Historically, seller financing has been the m ost im portant single source o f farm real estate credit, and the trend has been for this source to expand in periods o f tight credit and contract when the money market loosens. Such was the case in the tight credit period o f 1969-70 when sellers financed approxim ately 60 percent o f all farm land transfers. Last year, however, due m ainly to the dram atic rise in farm real estate loan volume (up nearly 2 V2 times over 1972), sellers financed only about 40 percent o f the total. Farm enlargement Rising farm incom e levels in 1972 and 1973 allowed farmers to begin replacing farm equipment at a rapid pace. For in stance, in 1972 tractor sales jumped 19 per cent above the previous year, and aggre gate sales o f seven m ajor farm m achines rose 4 percent. A s incom e rose further in 1973, farmers were encouraged to purchase additional equipment in order to utilize the accelerated depreciation schedules and the 7 percent investm ent tax credit that reduc ed taxable incom es and tax payments. Tractor sales increased 26 percent last year, and aggregate sales o f the seven ma jor farm m achines jumped 22 percent. As farmers acquire these large, expen sive, high-capacity machines, m any are motivated to add land to the existing enter prise in order to spread fixed cost over a larger base. Tim e constraints dictate that additional land be in rather close proxim i ty to the existing farm, thereby limiting the potential supply o f land for any individual farmer to a narrow geographic area. The limited source o f supply suggests that higher prices for available land will be the normal result. And while the potential economies o f scale m ay justify the higher prices for farmers who wish to enlarge their operations, such actions tend to raise the price o f land for all buyers. A hedge against inflation Farmland values increased four times faster than the inflation rate during 1973, leaving owners well protected against the effects o f the depreciating dollar. Inflation in business and industry as measured by the implicit price deflator for private GNP has averaged 3 percent compounded an nually in the 25-year period 1947-72. The average price o f an acre o f farmland in creased at nearly a 6.25 percent rate during the same time period. Consequently, a long-term investm ent in farmland has served as an effective hedge against infla tion. Such prospects for future long-term capital gains have created speculative de m and for farm land based solely on expec tations o f continued price increases. The speculative trend is reflected by the number o f farm land purchases made by nonfarm ers from outside the area in which the farm land is located. According to Seventh District bankers, the proportion o f nonfarm er buyers increased from 1970 to 1973 in each o f the district states except W isconsin. Nonagriculture uses An increasing am ount o f farmland 12 has been diverted to nonagricultural uses in recent years. In Seventh District states, the highest levels o f diversion have oc curred in M ichigan and W isconsin. It is es timated that 7 percent o f the farm land sold in these Lake States during the year end ing March 1, 1973 w ill probably be con verted to recreational or residential use within five years. A rising level o f affluence, shorter workweeks, and longer vacations have increased the demand for re cre a tio n a l properties and “ second hom es.” In contrast, it is estimated that only 3 percent o f the farm land sold in the C om Belt States—which include Illinois, Indiana, and Iow a—is likely to be con verted to such uses within five years. As a result o f the higher level o f non a g ricu ltu ra l d em a n d , the value o f M ichigan and W isconsin farm land in creased faster than in other district states throughout m ost o f the 1960s and the early 1970s. While the demand for farm land for nonagricultural use in these states con tinued during 1973, it lost much o f its urgency. H igher interest and the threat o f fuel shortages are two m ajor reasons why the demand abated. W isconsin farmland prices increased only two-thirds as fast as the average o f all district states in 1973, and M ichigan farm land prices grew at about four-fifths the average for the district. Outlook The levels o f farm incom e and interest rates will likely continue to be the m ost im portant factors influencing the demand for farm land in the months ahead. Net farm incom e is expected to range between $21 Federal Reserve Bank of Chicago and $24 billion this year, down somewhat from 1973 due m ainly to increases in the costs o f production. Nevertheless, the pro jected level would be the second highest on record and undoubtedly will support further increases in land values, albeit at a slower rate than during 1973. R ising in terest costs on new farm m ortgage loans may further temper the advance in land prices. A t the start o f 1974, m ortgage rates were from .50 to 1 percentage point higher than a year ago, and have m oved generally upward since then. Shortages o f som e key farm inputs, such as fuel and fertilizer, as well as restric tions on auto travel, also are likely to be negative factors affecting land prices, while the spillover effect o f 1973’s boom ing farm equipment sales could increase pressures for farm enlargements. A con tinuing high rate o f inflation should serve to provide further support. Through the first quarter o f 1974, farmland values in the M idwest continued to rise at an accelerated rate. However, an increasing proportion o f bankers foresee a stabilization o f land prices in the months ahead. Such views would be consistent with changes in farm land values in similar previous periods. Historically, very rapid increases in farm land values have been associated with short-lived peaks in crop prices. Subsequent declines in crop prices have been followed by at least one year o f decrease in land prices along with a cost-price squeeze on farmers, especially the m ost recent buyers o f farmland. Terry Francl Business Conditions, April 1 9 7 4 13 B an kin g d evelo pm en ts Consumer credit at banks Instalm ent loans at the nation’s commer cial banks rose 16 percent in 1973—the same as total consumer instalment debt— thus m aintaining their existing share o f the instalm ent loan market. Banks a c counted for 47 percent o f total instalment credit outstandings at the close o f 1973, against 25 percent for finance companies. Mobile hom e loans were the fastest grow ing com ponent o f banks’ instalment credit last year, rising 25 percent. Auto loans, w hich make up 45 percent o f all com mercial bank instalm ent credit, rose 15 per cent. Banks reported relatively slower gains in hom e improvem ent loans last year than for other m ajor types o f instal ment credit. Nonetheless, growth in hom e im provem ent loans outstanding was more rapid than in 1972 or 1971. These national trends are reflected in the latest available instalm ent credit data for Seventh District banks (through mid1973). In the 12 m onths ended last June 30, instalm ent loans at district banks rose 18 percent, nearly the same as the gain for all insured com m ercial banks in the nation. The increase w as even larger in 18 o f the Seventh District’s 35 SM SAs—as high as 42 percent in Fort Wayne. Auto loans, which increased 17 per cent in the district, continued to account for the largest dollar increase, with out standings com prising alm ost h a lf o f total consum er instalm ent debt at banks in the district SM SAs. Gains in bank card credit were even larger than the nationwide gain, and evidenced the grow ing importance o f this activity in m any areas. Credit card and check credit outstanding at district banks at mid-1973 was a little over $800 million, nearly 28 percent higher than the previous year’ s level. This category ac counted for 8 percent o f total instalment credit at district banks, about the same as a year earlier. F inancing o f other consumer durables, hom e im provem ent loans, and personal loans, on the other hand, rose less rapidly than nationally. Mobile home loans Although the purchase and financing o f m obile hom es have declined significant ly in recent months, this marks a setback in a strong upward trend. M obile home loans in the district were up 39 percent in the 12-month period ending last June 30, compared with a 34 percent increase for the nation. District outstandings were over $1 billion in mid-1973. These loans accounted for nearly 11 percent o f district banks’ in stalment credit, compared with 8 percent just two years earlier. A t the national level, banks’ portfolios o f m obile hom e loans tripled in the period 1969-72. It is believed that com m ercial banks hold more than one-half o f all mobile hom e credit, and these holdings com prise about 10 percent o f all outstanding instalm ent credit at banks. T o some degree, this rapid growth reflects the public’s substitution o f mobile hom es for conventional housing. Indianapolis banks are the district’s biggest m obile hom e lenders with almost $131 million outstanding, about 23 percent o f all their consumer instalm ent loans. Indiana and M ichigan are am ong the leaders in mobile hom e manufacturing. In diana district banks reported an increase o f alm ost 68 percent in m obile home loans, with total outstandings o f $308 million at midyear 1973. M ichigan banks, with $289 million outstanding, slipped to second place in the district. A number o f banks in Consumer instalment loans at all insured commercial banks Percent change. June 30. 1972 to June 30, 1973 Other consumer qoods paper Mobile Credit cards and Home homes check credit Other improvement Outstanding, June 30, 1973 (millions of dollars) Total Auto 70,727 19 19 34 24 19 11 14 9,604 18 17 39 28 14 9 11 38 56 2,171 61 141 112 108 96 15 13 17 20 14 18 16 24 13 8 19 16 17 19 17 20 15 26 65 24 43 80 55 39 43 * 30 50 17 25 -87 64 0 59 -1 6 39 6 22 63 -21 30 5 5 4 43 5 9 15 3 7 7 57 4 10 1 10 31 156 145 560 47 31 111 67 12 42 22 28 8 4 35 25 14 46 20 19 2 5 31 24 39 47 140 127 26 38 47 40e 33 20 -50 29 22 7 20 * 14 88 23 46 159 27 26 45e -1 0 41 - 2 22 3 -12 - 3 14 2 30 8 2 -2 0 - 5 53 19 48 126 25 40 29 12 26 7 25 14 11 27 7 18 21 - 2 82 42 20 39 29 51 0 * * 38 62 15 35 24 22 9 -21 16 10 3 5 13 - 4 - 9 83 1,388 202 213 63 107 404 35 94 6 22 16 29 19 24 21 36 22 22 22 34 14 22 26 23 33 17 19 30 84 42 17 85 - 6 181 20 52 32 30 17 15 28 26 29 50 - 5 28 - 1 23 55 90 28 - 5 11 14 8 10 1 13 21 11 33 52 5 37 8 21 30 30 87 40 8 46 19 90 369 42 15 28 13 15 33 20 24 15 11 40 35 20 3 79 73 24 50 27 32 83 89 26 13 48 73 -5 0 -13 26 1 9 - 5 0 16 83 11 U n ited States Seventh D is tric t Personal loans SM SAs: Illin o is Bloomington Champaign Chicago Decatur Peoria Quad Cities Rockford Springfield Indiana Anderson Ft. Wayne Gary-Hammond Indianapolis Lafayette Muncie South Bend Terre Haute Io w a Cedar Rapids Des Moines Dubuque S io u x City Waterloo M ichigan Ann Arbor Detroit Flint Grand Rapids Jackson Kalamazoo Lansing Muskegon Saginaw Wisconsin Green Bay Kenosha Madison Milwaukee Racine * N o t co m p u ted due to sm all base am o u n t. eP a rtly estim ated . N o te: T h e Bay C ity , M ich igan area data are n o t published to avoid disclosure o f individu al bank figures. Business Conditions, April 1 9 7 4 these areas becam e specialists in this type o f financing as the industry developed, and they have made m obile hom e loans on a nationwide basis. N ational demand for m obile hom es is, therefore, an important factor affecting their expansion. As an indicator o f this demand, total shipm ents o f new mobile homes to all U. S. dealers increased approxim ately 10 per cent for the year ending June 30,1973 ac cording to data published by the Mobile Home M anufacturing Association. Ship ments to dealers in the five district states actually declined about 5 percent, how ever. In the same period, the average wholesale price o f a new m obile home unit increased by 10.5 percent, reflecting in part a shift toward larger units. Given the rise in prices o f both new m obile homes and conventional houses, increased demand for used m obile homes m ay have affected the growth o f these loans. Member bank operating ratios Profitability o f large district member banks was lower in 1973 than in 1972, while, in the same period, profitability o f sm all banks was greater. The 1973 ratios o f net incom e to equity capital ranged from an average o f 10.3 percent for banks in the over $500 m illion deposit-size group to 12.2 percent for banks in the $10-25 m il lion group. The average for all member banks was 11.7 percent. These and related ratios o f Seventh District member banks are presented in Operating Ratios, an an nual publication o f the Federal Reserve Bank o f Chicago. The ratios are arithmetic averages o f individual banks’ ratios. Indi vidual bank ratios are computed from data reported in the Consolidated Report o f In com e for 1973, and averages o f C onsol idated Reports o f Condition for Decem ber 1972 and June and December 1973. 15 The effects o f high short-term interest rates in 1973 account for m ost o f the varia tion in changes in profitability. Ratios of interest paid on time and savings deposits to total time and savings deposits aver aged 5.12 percent for all district members in 1973—an increase o f 39 basis points from 1972; the average for the largest banks (deposits greater than $500 million) increased 121 basis points to 5.92 percent, reflecting increases in rates paid on cer tificates o f deposit in denom inations o f $100,000 or more. Further, interest on borrow ings and capital notes and deben tures, w hich had absorbed 8.57 percent o f operating incom e at the largest banks in 1972, absorbed 14.60 percent o f income in 1973. This large increase is traceable to heavier use o f short-term borrowings, in cluding purchases o f federal funds and sa les o f securities under repurchase agreements, coupled with high short-term interest rates. O n the other hand, high in terest rates boosted the incom e o f the banks that sold federal funds, particularly those in deposit-size groups under $25 million. For banks in these size groups, 1973 ratios o f interest and fees on loans to gross loans averaged at least 100 basis points higher when adjusted to include in terest on and am ounts o f federal funds sold and securities purchased under agree ments to resell. A t the “ average bank,” interest and fees on loans accounted for 65.78 percent o f operating incom e in 1973, compared to 62.75 percent the previous year. The major expense item, interest on deposits, ab sorbed 43.78 percent o f operating income, and salaries and employee benefits ab sorbed 19.06 percent. Since three-fourths o f district member banks have deposits o f less than $50 million, average ratios for all members are influenced considerably by these banks. ■
@FedFRASER